It says something about the fortunes of Hewlett-Packard when the "best" financial news for the company this year is a vague rumor of a takeover effort by famed corporate raider Carl Icahn. After over a decade of acquisitions that never seemed to play out the way HP's management hoped, the stock market is betting that the company is worth more broken up into pieces than continuing in its current ponderous form.

On Monday, rumors of an Icahn takeover drove the company's stock up more than four percent; its value is up six percent as of noon today. More than anything, the response by the market to the Icahn rumors are a vote of no confidence in the direction CEO Meg Whitman and the company’s board are steering HP.

When Whitman took over as CEO last October, I suggested that the best path for the future of HP's PC division was to spin it off and give someone else a chance to manage it. But now, it's questionable whether breaking apart the company would get any more value out of it, other than freeing up HP's Personal Systems Group to swim clear of the wreckage. As they stand now, few of the other units could survive independently after being dependent on the teat of HP's printer ink for so long.

A decade of fail

Whitman has tried to put HP's bad news behind her, but it keeps coming back. At an analysts' briefing in October, she tried to clear the air by publicly airing all of the company's previous problems and the challenges it faced, and she pitched a four-year path to return the company to profitability. But then in November, as the company reported its annual results, HP announced it was writing off $8.8 billion after discovering the company had paid $5 billion too much for Autonomy (something Oracle CEO Larry Ellison told HP last year when he revealed he had declined to buy Autonomy for a lower price tag). HP claimed the deal was based on fraudulent inflation of Autonomy's book value by former executives.

But HP's problems run deeper than just a few bookkeeping errors. The company has made a long string of acquisitions that have ended poorly or have fallen well short of their potential. From the acquisition of Bluestone Software in 2001 for $470 million (which Carly Fiorina shut down just a year later—and paid BEA $5 million to take Bluestone's customers off her hands) to the painful squandering of Palm, HP's management has consistently done one thing well: screw up.

"You're seeing a disconnect between the companies they purchase versus the arms of the business that have been there," Gap Intelligence President Gary Peterson told me in a phone conversation today. The company's strategy, Peterson said, has been to use money from the printer business to acquire new lines of business and support them until they were profitable on their own. "It was working quite well when [former CEO Mark] Hurd was in charge," he said. "But the story has gone in a completely different direction since then."

"Part of the problem HP faces is that many of the acquisitions it made over the past decade using the ink-and-toner stained lucre from the company's printer business have failed to integrate with the business lines they already had (like, for example, the printer business)," Stephen Beck, the managing director of research firm CG42, wrote in an e-mail exchange. Beck said that HP has failed to do anything to make those services a compelling reason for customers to do business with the company.

When Meg Whitman was brought in as CEO," Beck said, "we were on record as saying we didn't believe she was the right choice... that her initial pronouncements that the turnaround of HP was primarily about execution were misguided. We felt strongly that HP needed to have a compelling answer for why a consumer or customer should select HP—in essence a clear value proposition. After over a year on the job, Ms. Whitman is still unable to articulate 'why HP?'"

That failure to articulate what HP is—"the failure of the HP leadership to craft a compelling reason for consumer, customers, and investors of why HP should be viewed as greater than the sum of its parts," as Beck said—is why some argue the company should be broken up.

The best case scenario: "An Apple-like organization"

For some parts of the company—the Personal Systems Group in particular—a breakup could be a positive thing, because they wouldn't be dragged down by the company's losing investments.

"It's sort of Business 101 that [if] an organization has a singular focus on a market, it would do better," Peterson said. "If the Personal Systems Group spun off, I think they would be a huge powerhouse in the industry, even more than they are today."

The reason, Peterson explained, is that PSG could direct the revenue from its printer business into doing more research and development than the group currently can afford. "Up until now, it's mostly funded very bad purchase ideas—there's about $20 billion in acquisition investments that were paid for by printer ink. If they broke off, that would be buying R&D instead. What that would mean is 5 to 10 years from now, when they've chipped the rust off and are able to focus exclusively on PSG's market, and the products start coming out of the labs, HP would be in a position to be an Apple-like organization."

That would mean bad news for HP's PC competitors such as Dell and Lenovo, because HP already has an edge in that market due to its retail and reseller channels, Peterson believes. The same is true of HP's enterprise IT hardware business.

Cutting the head off the snake

Even if some of the units of HP would be successful, simply breaking the company up would probably not pay off—if only for the reason that some of HP's units wouldn't be able to compete without the support of HP's PC and printer units. "Right now HP is more dependent on its printer component than it has been in a decade," Peterson said.

And even for the most healthy business units, a breakup under the guidance of HP's current leadership wouldn't necessarily be a good thing. "Would [a breakup] benefit shareholders?" asked Beck. "Maybe. Does it benefit customers? Not necessarily. Without HP management altering their focus away from what they have and how big they are, toward why they should be chosen and where they will lead, my fear would be a break-up would lead to little more than a shift from one, big misdirected company to a range of smaller, misdirected companies."

Peterson puts the blame for the company's worsening position squarely on HP's board of directors—of which Meg Whitman was a member during former CEO Leo Apotheker's brief tenure. And he thinks it's time for them all to go. "I can't think of a more dysfunctional board in the history of corporations," Peterson said. "I don't know if Meg [Whitman] is the one to get HP out of this mess, and I don’t see it getting better with the leadership that they have on the board. They need to chop the head off the snake and start fresh." The least expensive way to fix the company, he said, is to remove the board, and pick a new CEO who can take all of HP's pieces and make something more appetizing than the pile of poultry feces it currently resembles.

Blood in the water

If there were ever a time for someone to acquire, it would be now. With HP's stock at its lowest point since July of 2002, the value of all HP's outstanding shares is $21.2 billion—a tenth of the size of IBM's market capitalization. Even after spending a large chunk of its cash on hand on stock repurchases and dividends, Apple could just write a check for all HP's shares at their current value (not that Apple would ever make such an ill-advised acquisition).

For a few hundred million, someone like Icahn could obtain one or two percent of HP's stock. And that someone could convince the mutual funds and institutional investors that own 77 percent of HP (such as State Farm Insurance) that he or she can do a better job with their investment than Whitman and the rest of the board—obtaining proxies for their votes at the next stockholder meeting in March.

In 2011, HP faced just that situation when activist investor Ralph Whitworth's Relational Investors LLC took a one percent stake in the company. To prevent him from moving to break the company up, HP gave him a seat on the company's board. The company also hired Goldman Sachs in 2011 to help create a "poison pill" defense against hostile corporate takeovers.

But those moves won't help HP's management if the company's major stockholders turn on them. Given how things have been going under the current board—of which Meg Whitman was a member before being elevated to CEO—that's a distinct possibility.

72 Reader Comments

When Carl Icahn becomes involved with your company, it's never good for anybody except Carl Icahn and anyone else looking to make a short-term cashout. Pretty much the only benefit to anything that guy does is that he scares companies into performing better, just as a wounded animal will keep moving just to keep the vulture from getting too close.

Why does Icahn or anyone else need to own 1% of the stock in order to get institutional votes by proxy? If a person is trustworthy enough shouldn't he be able to purchase 1 share and then convince institutions?

I agree that a drastic re-organization should be planned. Look at the business lines: which are profitable, which could be, and which are just pissing money down a hole. Scrap set 3.

Regarding the Apple comment, provided Apple could get over themselves I think an acquisition of HP could be a brilliant move. If they put the effort into an Enterprise ecosystem they have around iOS, I don't think they'd have to invest a significant portion of their assets to put the "Apple polish" on an entire enterprise ecosystem, and people would probably buy into it for simplicity's sake.

Why does Icahn or anyone else need to own 1% of the stock in order to get institutional votes by proxy? If a person is trustworthy enough shouldn't he be able to purchase 1 share and then convince institutions?

It's a lot easier to trust someone with your vote if you know they have a few hundred million dollars of their own riding on the outcome.

This suggest that the purchase of Palm was ever a good idea. It was a horrible purchase for the price as Palm was dead company walking already and if they really wanted the talent the could have either got a much better price or just offered jobs.

Sometimes the answer to a failing company is to simply stop doing products that make you very little profit. I think Apple has proved that you can build a limited product line covering a lot of the technology market without having so many products that it hurts the bottom line. The PC industry is filled with laptops, desktops that pretty much copy each other. Or come very close to. In the end that becomes a race to the bottom as prices drop. Apple on the other hand makes a product in limited versions and sets a firm price. HP, Dell and the rest would do way better to make products in a more limited model basis and create model that define themselves rather then copy someone else. HP as its business model relies on quantity then quality and good margins. You can sell printers HP that are under $100 but a printer cartridge for it cost $30- $40 ? Their is something wrong in that marketing HP. That's what you need to fix.

Carly is 100% to blame, her psychopathic chopping and slashing everything resembling a brain at HP left it a vague shell only resembling a computer company. Then to ram the stake fully home the psychobitch then slammed Compaq into the mix with huge doses of political garbage, its a wonder they are even still open.

When Carl Icahn becomes involved with your company, it's never good for anybody except Carl Icahn and anyone else looking to make a short-term cashout. Pretty much the only benefit to anything that guy does is that he scares companies into performing better, just as a wounded animal will keep moving just to keep the vulture from getting too close.

If Icahn gets involved, you know two things as an employee:1. You're screwed.2. Your company is being broken up into little pieces to appease him.

He doesn't introduce any motivation, that's like saying the beatings will continue until morale improves.

Many years ago HP did an enornous spin-off, of the test equipment division (now Agilent). There's no reason they couldn't do more spinoffs.

So should they have not gotten rid of Mark Hurd? That's what Larry Ellison said at the time.

And in defense of Meg Whitman, she found the company (especially some botched purchases) in considerably worse shape than she thought it was in when she first came in. and she's been doing a lot of corporate tear down. I'd give her a chance.

I remember another HP blunder. They made servers, and partnered with Cisco to provide the routing to their servers. Then they decided to build their own routers. This infuriated Cisco to the point that Cisco started making their own servers.

The entire HP saga is like a perpetual motion machine, with the core mechanism being a revolving door of assholes. Fiorina? Whitman? Icahn? I feel sorry for HP employees.

Like others here, I am incredulous that Ars would quote Rob Enderle, who is so spectacularly wrong so frequently that it's amazing he's never held a leadership position at HP. That said, I'm willing to overlook it this time because the article also contained this beaut of a phrase, which should henceforth be mandatory in any article involving the company: "dependent on the teat of HP's printer ink."

I'm also appalled by the Enderle quote, but for once he isn't horribly wrong.

Trouble is, what to axe and how? HP isn't unsuccessful, they're just stuck with terrible leadership and stuck in neutral. Divestiture or a re-focus makes sense on the surface, but in reality, it's difficult to disentangle the valuable pieces. Printers and PCs and servers are sold together. And those sales supply a foot in the door for enterprise software.

The key issue is the shrinking consumer market and for that I say create an exclusive partnership with a (hopefully enormous) retail partner. Supply the support staff and free maintenance and get into a strong branding push. That will give you options and breathing room and an ally, since MS is abandoning you.

For the business side, I'm at a loss. I don't know the market well, but from the outside, it seems challenging at best. They have very little to build on that is unique. Itanium is going away, Oracle, MS and IBM are entrenched and hugely profitable. The cloud providers are too big to challenge. HP has a comfortable legacy business, but it looks cornered strategically.

Not only did you include a quote from shill-for-hire Enderle you did not mention anywhere in the article that he is on the payroll of HP. That's not unimportant context. What the hell?

He's been paid by every PC vendor at one point or another. I have removed the quote, and apologize for including it in the first place. Enderle was a columnist for a certain trade pub I worked for, and I dropped him then; In a moment of fatigue today, I took the comment he sent me and saw it as painfully obvious but worth reporting for context purposes. I have removed the quote because it did nothing for the story, and I realized my mistake.

On a related note, one should not write stories from a hospital room.(clarification: I'm not the one hospitalized, but i have been spending a lot of time there. I'll be writing about that experience tomorrow)

I'm not convinced. HP has had two problems. Bad acquisitions, and a revolving door at the CEO's office. I'm not convinced the solution to the latter is yet another replacement CEO. The company needs some stability for a change. Whitman has not worked any miracles in her year, but she also hasn't broken anything or tried to acquire anybody, and her leadership has generally moved things in the right directions (just not as fast as perhaps some people want).

It's possible the reason nothing has changed dramatically is that a company of this size doesn't change dramatically this fast. I don't think the solution to too much rapid change is more rapid change in yet another new and unplanned direction.

Carly is 100% to blame, her psychopathic chopping and slashing everything resembling a brain at HP left it a vague shell only resembling a computer company. Then to ram the stake fully home the psychobitch then slammed Compaq into the mix with huge doses of political garbage, its a wonder they are even still open.

That's no joke! But it took Hurd to finish the job of killing research.

No one wants anymore to pay HP's highway robbery ink prices, so that cash cow *will* disappear. What they need to do is scrape together their remaining cash and buy back Ajilent. Install one of those people as CEO and then slash and burn the present board and CxOs. Build calculators and scientific instruments again and leave the overpriced consulting and SaaS crap to IBM. And claw back cash from Fiorina, Hurd, and Apotheker, though I think he was only meant to be a scapegoat.

Apple on the other hand makes a product in limited versions and sets a firm price.

Apple gains some benefits from this, but the problem is that they sell themselves as a premium luxury item without actually being, well, luxurious. Their image is entirely based on branding and aesthetics, rather than actual value, which is why they have been unable to win at the PC market and are losing ground in the smartphone and tablet markets - they had a good initial marketing push but they're unable (or unwilling) to compete on value, forever condemning themselves as niche players.

Copying Apple isn't really a sure route to success, though I agree that HP needs to focus in on what they're doing. That being said...

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You can sell printers HP that are under $100 but a printer cartridge for it cost $30- $40 ?

To be fair, this is the result of a few things coming together.

The first thing is that printers run on the razor and blades business model - the printer's cost is subsidized somewhat, while the ink makes up for it. Or to put it simply, they're selling the printers for less than they "should" so that you buy ink from them.

The second thing is that ink is actually shockingly expensive in the first place. I will note that they are starting to switch over to a more sensible model where they sell you ink instead of selling you the print head as well (which will help with the cost somewhat, as then you don't have to pay for the head every time, which is in and of itself somewhat expensive, though the downside is you'll have to replace the printhead seperately periodically), but the ink itself is not exactly super cheap to make. There is a lot of R&D that goes into it (a lot more than most people would believe) and the ink compontents and production is not exactly inexpensive, especially for specialty inks (the solvent based inks are pretty nasty stuff, though you probably don't use those in your home printer). But R&D is a major cost, and they spend a good amount on it. They still do make money hand over fist, but the cost per page to the average end consumer isn't actually terribly unreasonable.

You can use refills and similar, but you'll get much lower quality ink, the cartridges have a higher chance of failure, ect. While the cartridges ARE designed specifically to stop printing after a while to preserve print quality (and to make refilling them much harder), the truth is that if you mess up filling an ink cartridge, it can fail and leak all over the inside of the printer, which is quite a mess.

I will also note that HP makes the best ink and printers; there is one competitor who is close, but they're also close in terms of pricing so its not like you get a better deal there.

Quote:

Carly is 100% to blame, her psychopathic chopping and slashing everything resembling a brain at HP left it a vague shell only resembling a computer company. Then to ram the stake fully home the psychobitch then slammed Compaq into the mix with huge doses of political garbage, its a wonder they are even still open.

Carly, for all her faults, was not the problem that everyone after her was. She had a plan, and then she stopped being CEO mid plan and no one else followed up on it, with a variety of CEOs all thinking they "knew better" and lacking any sort of coherent plan for progress.

The problem is that the board is going through CEOs like tissue paper, but the ultimate problem is that the board itself is incompetent and incapable of hiring a good CEO.

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1. You're screwed.2. Your company is being broken up into little pieces to appease him.

When Carl Icahn becomes involved with your company, it's never good for anybody except Carl Icahn and anyone else looking to make a short-term cashout. Pretty much the only benefit to anything that guy does is that he scares companies into performing better, just as a wounded animal will keep moving just to keep the vulture from getting too close.

If Icahn gets involved, you know two things as an employee:1. You're screwed.2. Your company is being broken up into little pieces to appease him.

He doesn't introduce any motivation, that's like saying the beatings will continue until morale improves.

Often times they'll respond by pushing forward the unpopular but necessary structural moves to prove to the board and shareholders that they're more viable without him. Otherwise, they enact the poison pill, like Netflix had to do a few months ago to keep Icahn's hooked beak out of them.

I bought a cheap HP laser printer the other year and although it is good quality, I was amazed by one thing: it's a "host-based printer". That is to say it's a "winmodem" printer: it has no high level internal processor that can understand print languages like PCL5 or PostScript, it relies on the driver do all this work and the PC/driver just effectively send the printer a bitmap. So you can't, for instance, plug your printer into your home network NAS print server (which runs embedded linux) because it doesn't have the printer drivers. And to print from Windows, you need a monstrous driver. This makes sense from the point of view that HP can save money by putting less RAM in their printers. But it means that they have to maintain these complicated drivers for any number of OSes rather than just relying on a much simpler PCL5/PS driver. I'd expect this from an upstart printer company, but surely over the years, HP could have cost reduced and cost reduced printer language ASICs to be effectively free. This is HP after all!

It all just struck me as saving money in the BOM per unit, but costing far more per unit in the long run with support and driver development. And that to me is just backawards. So when this printer dies, or when I can't do without a networked one, I doubt I'll buy HP again.

So maybe the company has survived on printer ink money for all this time, but I doubt that even that cash cow will last much longer.

Carly, for all her faults, was not the problem that everyone after her was. She had a plan, and then she stopped being CEO mid plan and no one else followed up on it, with a variety of CEOs all thinking they "knew better" and lacking any sort of coherent plan for progress.

Carly oversaw HP's rapid decline - the company's value halved. Halved. You believe she had a plan and things were about to get better?

Carly, for all her faults, was not the problem that everyone after her was. She had a plan, and then she stopped being CEO mid plan and no one else followed up on it, with a variety of CEOs all thinking they "knew better" and lacking any sort of coherent plan for progress.

Carly oversaw HP's rapid decline - the company's value halved. Halved. You believe she had a plan and things were about to get better?

I think Sam Jain could have done a better job.

Uh, the company value halved because she became CEO in 1999 and stopped being CEO in 2005. I seem to recall there being some sort of tech bubble in the late 1990s, which lasted until 2001... what was that again?

Oh right.

Seriously, it halved because the stock was overvalued when she became CEO.

Was Compaq a good acquisition? No. It was stupid, and Compaq made terrible computers. But it wasn't all bad.

She was a mediocre CEO, but she was replaced by a series of CEOs who could not run the company at all.

I bought a cheap HP laser printer the other year and although it is good quality, I was amazed by one thing: it's a "host-based printer". That is to say it's a "winmodem" printer: it has no high level internal processor that can understand print languages like PCL5 or PostScript, it relies on the driver do all this work and the PC/driver just effectively send the printer a bitmap. So you can't, for instance, plug your printer into your home network NAS print server (which runs embedded linux) because it doesn't have the printer drivers. And to print from Windows, you need a monstrous driver. This makes sense from the point of view that HP can save money by putting less RAM in their printers. But it means that they have to maintain these complicated drivers for any number of OSes rather than just relying on a much simpler PCL5/PS driver. I'd expect this from an upstart printer company, but surely over the years, HP could have cost reduced and cost reduced printer language ASICs to be effectively free. This is HP after all!

It all just struck me as saving money in the BOM per unit, but costing far more per unit in the long run with support and driver development. And that to me is just backawards. So when this printer dies, or when I can't do without a networked one, I doubt I'll buy HP again.

So maybe the company has survived on printer ink money for all this time, but I doubt that even that cash cow will last much longer.

Well, you could just buy a better printer, instead of your self-described "cheap" one. I've got an HP laser printer with Ethernet, no WIndows needed, and it cost me $200 last year. I would expect that most of the printer division's hardware sales come from higher-end business printers though.

Carly, for all her faults, was not the problem that everyone after her was. She had a plan, and then she stopped being CEO mid plan and no one else followed up on it, with a variety of CEOs all thinking they "knew better" and lacking any sort of coherent plan for progress.

Carly oversaw HP's rapid decline - the company's value halved. Halved. You believe she had a plan and things were about to get better?

I think Sam Jain could have done a better job.

Uh, the company value halved because she became CEO in 1999 and stopped being CEO in 2005. I seem to recall there being some sort of tech bubble in the late 1990s, which lasted until 2001... what was that again?

Oh right.

Seriously, it halved because the stock was overvalued when she became CEO.

Was Compaq a good acquisition? No. It was stupid, and Compaq made terrible computers. But it wasn't all bad.

She was a mediocre CEO, but she was replaced by a series of CEOs who could not run the company at all.

Not every tech company halved, HP did worse than many. HP was an actual business with actual customers and products, not toothbrush.com. But really, you think she was going to turn it all around?